Question

How to explain price stability in the context of quantity theory of money and neutrality? Consider the Fisher effect and discuss its relation with the real interest rate.

Answer #1

According to quantity theory of money and neutrality, price level doubles with the increase in the quantity of money in the economy. This means the price stability has direct relationship. This means that for the same amount of goods and services consumer has to pay the double amount. The price stability is proportional to money supply in the economy.

According to fisher effects,

Real interest rate = nominal interest rate - expected inflation rate

This means that real interest rates Decrease when there is increase in inflation rate unless nominal interest rate will be same as rate of inflation

What is the neutrality of money with respect to the quantity
theory of money?
A.
The money supply can affect the growth rate of prices
(inflation) in the long run.
B.
The money supply cannot affect the growth rate of real GDP in
the long run.
C.
The money supply can affect the growth rate of the real GDP in
the short run.
D.
All of the above.

1. Using the quantity theory of money explain how the Friedman
Rule is obtained and its role for inflation stability.
2. Given the following Cobb-Douglas production function, Y =
ALαK(1-α ), demonstrate how you would show (using Excel logic) that
increases in labor cause an increase in output but at a decreasing
rate.

1. Recall the classical economists and one of their
favorite theories: the quantity theory of money and monetary
neutrality. The theory is expressed as an equation as follows: M x
V = P x Y. What does V stand for?
a. the value of the domestic currency
b. the velocity of money
c. the virtual reality of the universe
d. the velocity of investment spending in the economy
2. Following up on question 1 above, what does Y represent?
a....

Please show the model and explain the quantity theory of money
and how changes in the money supply can affect the FX
rate.

Can
you explain how the fisher effect theory affect GDP in relation to
inflation?

The quantity theory of money we discussed in class assumes that
the ratio of money to GDP is constant. This can be equivalently
expressed by the Fisher equation:
M ×V = P × Q
Where:
• M represents the money supply.
• V represents the velocity of money. which is the
frequency at which the average same unit of currency is used to
purchase newly domestically-produced goods and services within a
given time period. In other words, it is the...

What is the equation of exchange (quantity theory of money)? How
does it explain changes in employment and the price level? Analyze
figure 16-7 and explain what happens to inflation and employment as
the Fed changes money supply.
What are the pros and cons of the Fed’s credit policy?

Consider the equation of exchange (Quantity Theory of Money).
Imagine that it is true that velocity is fixed. Show that money
demand does not depend on interest rates. If this is true, draw a
graph of Money Demand.

What is the key endogenous variable in the quantity theory?
Explain the effect on this key variable of the following
changes:
A. The money supply is doubled
B. The velocity of money increases by 10%
C. Real GDP rises by 2%
D. The money supply increases by 3% while real GDP rises by 3%
at the same time

Explain the following statement: “The classical economists used
the quantity theory of money to explicitly explain changes in the
aggregate price level, but also used it implicitly to explain
aggregate demand”.

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